RASTA: Local Research, Local Solutions: Public Finance Management,volume Xvi

Fiscal federalism is the transfer of expenditure responsibility to lower tiers of government with reliance on the central government for resource transfers. Fiscal decentralisation, on the other hand, gives more autonomy to subnational governments for the basic needs of the people as key public sector decision-makers. This is encouraged to target efficiency gains by reducing wasteful expenditures. The current study examined the "Leviathan hypothesis" of government expenditures under fiscal autonomy and federal resource transfers to provincial governments in Pakistan. The time series analysis with structural breaks was applied to examine the Leviathan hypothesis. The findings support that the Leviathan tendency can be tamed by allocating more resources for development expenditures from fiscal decentralisation in comparison to fiscal federalism. Nevertheless, there is a long way to achieve self-sufficiency under provincial autonomy in taming the Leviathan as currently, the impact of the provincial revenue resources on the overall budget balance is positive but not very significant. For examining the distributional consequences on social sector budgetary allocations and social sector outcomes, the standard pooled OLS regression estimation technique was used after taking into account the time dummies and cross-sectional dummies for the provinces. The impact of expenditures was checked on education sector expenditure (both current and development). The study found that public resource utilisation using provincial tax revenue had positive distributional consequences through the avoidance of wasteful current education expenditures. Furthermore, slope coefficients of provincial tax collection with health infrastructure, both the number of dispensaries and hospitals, were statistically significant and positive and had a large magnitude. This illustrates that the Leviathan is tamed for public sector resource efficiency.